What is an Interest Only Mortgage?
Like the name implies, an interest only mortgage is a loan where the required portion of the monthly mortgage payment is interest only. The interest only payment period lasts for a specific fixed period of the total loan period. After the interest-only period ends, monthly payments consist of interest and principal payments similar to a more traditional mortgage. It is important to note that borrowers may make payments against the principal at any point.
At California Mortgage Advisors Inc., we understand that not every loan makes sense for every customer. Some loans, like an interest only mortgage, may make sense for some customers. However, we remain dedicated to making sure all of our customers, no matter how unique their borrowing situation is, receive the best possible loan to meet their specific needs. Our Mortgage Advisors are available now at (800) 927-6560 to assist customers in determining if an interest only loan is the best option for them based on their economic present and future. If you are ready to apply for a loan now, please click here to apply online.
At CMA, our interest only mortgages are usually adjustable rate mortgages with a fixed interest only period that lasts 3, 5, 7, or 10 years. The loan terms can range from 30 to 40 years. However, our Mortgage Advisors evaluate each applicant on an individual basis to give them loan terms reflective of their personal financial situation. We also offer 30 year fixed mortgages with a 10 year interest only period.
Advantages of an Interest Only Mortgage
With an interest only mortgage, borrowers are only paying a lower amount as it relates to their initial monthly payments. The total amount that they can expect to pay over the course of the loan is somewhat higher than that of a comparable traditional mortgage. The true advantage of an interest only mortgage is the financial flexibility provided by the smaller loan payment during the interest-only portion of the loan. The reason a relatively small number of people obtain interest only mortgages is because very few people are in a position to leverage the financial flexibility of the loan for long-term gain. While a CMA Mortgage Advisor can help customers decide if their particular situation warrants an interest only loan, these are a few of the more common situations why people apply.
Investment Flexibility
For certain individuals, an interest only mortgage allows them to take the money they would normally be paying towards a principal payment and invest it somewhere else. Assuming a sufficiently high return on this investment, they can come out ahead in the long run despite making interest only payments.
Custom Amortization Schedule
A traditional mortgage is extremely rigid and designed around the borrower having an equally rigid income stream. However, some borrowers have unique income streams or salary schedules. Their salary may include performance bonuses, commissions or other factors that cause their monthly income to fluctuate. For borrowers in this situation, an interest only loan may be ideal because it allows them to make principal payments on a schedule more reflective of their unique income structure.
Disadvantages of an Interest Only Mortgage
Realistically speaking, there are no disadvantages specifically associated with an interest only mortgage. However, the same flexibility that makes the loan appealing can also be detrimental. For example, since the homeowner is not gaining equity in their home during the initial stages of the mortgage, they are susceptible to market fluctuations or other situations where borrowers with a traditional mortgage would be financially insulated by their homes equity. At CMA, our Mortgage Advisors will help applicants ensure they are looking at the long-term ramifications of their loan.
Other Considerations
Recent regulations have led to interest-only loans being excluded from “qualified mortgage” status by the federal government. This means that lenders are at a dramatically increased risk when providing interest only mortgages. The practical result of these changes is that lenders are only likely to approve borrowers for an interest only mortgage if they have excellent credit, significant cash reserves, and a demonstrably high-income stream.
At California Mortgage Advisors Inc., we genuinely believe that we offer our customers the best mortgages in the industry. We have offered a variety of loans since 1993, which means our Mortgage Advisors have successfully matched tens of thousands of borrowers with loans tailored to meet their needs and unique financial situations. If you have questions on interest only loans, please call (800) 927-6560 to speak with one of our Mortgage Advisors or click here to apply online.
